Ukraine war prompts Chinese traders to eye base metals exports

Traders in China are seeking to move piled-up base metal stock in the country to Southeast Asia and Europe, where supply is tight, with export arbitrage terms turning positive since Russia's invasion of Ukraine

Since February 24, the ongoing war between Ukraine and Russia has stoked supply concerns and buoyed base metals prices on the London Metal Exchange (LME). The prices have become detached from their Chinese peers, generating wider import losses and, in turn, Chinese traders are seeing export profits.

For example, the aluminium import loss was pegged at $811.22 per tonne on March 8, having widened significantly since the start of the war when the loss was at $311.21 per tonne. Before that, the loss had been largely steady at around $100-200 per tonne, according to Fastmarkets’ calculations.

Market participants are of the view that the growing sanctions on Russia from the US and its allies will reduce the supplies of metals to the West, which could increase opportunities for the Chinese market.

Russia is a big manufacturer of aluminium and nickel, respectively accounting for 6% and 7% of global output.

“Although it’s not there yet to see profits in delivering stocks, there’re still profits to earn if only we could find any downstream consumers,” a Shanghai-based zinc trader said.

“There’s a 15% customs tariff for aluminium exports so, right now, traders are just drawing down stocks from bonded warehouses. But I think it’s feasible for finished product exports, such as [extrusions] due to tariff waivers,” a second Shanghai-based aluminium trader said.

“I’ve received plenty of [inquiries] for zinc and lead from mainland China in the past few weeks,” a source in Taiwan said.

Most deliverable base metals stocks – barring zinc in Shanghai Futures Exchange warehouses – rose in the week to Friday, March 4, according to the SHFE’s latest weekly stocks report.

Although zinc is the lone metal to have registered a loss, market sources said that downstream demand was overall lackluster. In contrast, LME stocks are at historical lows, signaling a regional imbalance.

“The export arbitrage is now opened to aluminium, nickel, lead and zinc, so we should be seeing some drawdown of SHFE and bonded inventories as the expectation is they will start flowing into Asia,” research firm Marex said on March 7.

Can Chinese stocks rebalance the world?

Despite the recent stock movements, market participants remain wary about quantities and timescales required to offset the shortfall in ex-China stocks – citing hikes in freight costs and uncertainty over the arbitrage window, as well as limited access to overseas markets.

“Theoretically, it’s profitable to do exports now, but it’s difficult to find customers overseas, not to mention that high freight costs and logistic issues have been discouraging export trades,” a fourth Shanghai-based trader said.

“I’ve heard some exports to Southeast Asian markets, but I have doubts about the consistency of exporting. There is still uncertainty in the market right now,” the trader added.

And a copper trader said the impact on that market was likely to be limited.

“Traditionally, China is mainly a net importer of copper, so I don’t think the situation will change any time soon simply because of the brief opening of the export arbitrage window,” he said.

China imported 3.63 million tonnes of refined copper in 2021, down by 22.3% year on year, and exported 932,451 tonnes over the same period, a 25.3% increase on the 744,457 tonnes exported in 2020, according to the country’s customs data.

Jinfan Yang in Shanghai contributed to the story

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